Paul Grewal – Chief Legal Officer at Coinbase – has cleared the air on the company’s latest 10q which included worrying language pertaining to the management of customers’ funds in the event of bankruptcy. Grewal stated that a bankruptcy event at Coinbase is highly unlikely, and explained how users’ funds are currently kept secure.
Are customers’ funds safe?
In a statement on Wednesday, the CLO clarified that customer funds and corporate assets are kept separate within Coinbase’s internally audited ledger. Therefore, there are no questions about whose fiat currency – or cryptocurrency – belongs to whom.
Furthermore, the exchange does not engage in lending or other activities with customers’ assets unless given explicit permission to do so. In the 10q report released in May, Coinbase claimed that customers’ crypto assets were not protected by FDIC insurance.
In traditional finance, it is common practice for banks to use the funds deposited by their customers to issue loans. This means only a fraction of total deposits is available for withdrawal at any given time, creating risks for customers in the event of a bank run.
“Coinbase always holds customer assets 1:1,” stated Grewal. “This means that funds are available to our customers 24 hours a day, 7 days a week, 365 days of the year.”
The bankruptcy black swan
The legal officer’s final point addressed the company’s retail user agreement. The agreement has been updated to clearly establish that retail customers’ assets are protected under UCC Article 8, just like institutional clients.
This is contrary to the initial report’s claim that custodial-held crypto assets could be subject to “bankruptcy proceedings”, and be considered property of a bankruptcy estate. “Such customers could be treated as our general unsecured creditors,” it read.
Grewal claimed that the modification is not a change to the company’s effective treatment of digital assets. “We believe that digital assets in our custody have always been Article 8 financial assets,” he said.
Coinbase CEO Brian Armstrong issued an apology for the report’s language soon after it was released. He explained that the disclosure made sense at the time, in that such legal protections are yet to be tested in court for crypto assets.
“We should have updated our retail terms sooner, and we didn’t communicate proactively when this risk disclosure was added,” said the CEO.
Coinbase stock has gone down massively in recent months, in tandem with the cryptocurrency market. A spokesperson from the company recently revealed that four top officials jointly sold off over $1 billion worth of COIN stock since going public – of which Brian Armstrong was one.